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OYO Rooms: Start-up to Branded Budget Hotels, What Next?

According to report in The Hindu, India is home to the third largest Internet user-base worldwide. However, as per a Pew survey, its Internet penetration rate at 17% is much lower than the average of 34% across several aspiring countries. According to a statistics report, the number of Internet users in India is estimated to reach 407.11 mn in 2019 from 259.88 mn in 2015, primarily led by affordable access and improved awareness (Exhibit I). This indicates significant potential for growth in online marketing over the next few years. Mobile Internet usage has been growing rapidly over the past few years and continues to present huge opportunities. India has over 850 mn mobile subscriptions, more than 4x the number of Internet users. Driven by the availability of cheap smart phones and affordable Internet data plans, the number of mobile Internet users in India is expected to reach 462.26 mn by 2021 (Exhibit II).

The phenomenal increase in the number of internet users in India has deeply impacted the Indian online travel industry. According to a report titled ‘Indian Online Travel Industry’, 41% of travel gross bookings are taking place online, and the increasing Internet and mobile Internet penetration rates could play a vital role in the Indian online travel market growth story...........

Indian Hotel Industry in the Digital Era

According to World Travel and Tourism Council’s Economic Impact 2017, the GDP contribution of tourism industry in India accounted for 9.6% in 2017. By 2027, it is expected that the direct contribution of travel & tourism to GDP would reach $147.96 billion (Exhibit III).

Rating Agency ICRA Limited (formerly Investment Information and Credit Rating Agency of India Limited), estimated pan India hotel room occupancy of approximately 60%, with marginally higher Average Room Rates (ARRs) of INR5,300 during Q1 FY2017, supported by few key markets. Furthermore, as per ICRA report, as compared to FY2016, the first quarter of 2017 showed a decline in operating margins of hotels in India inspite of the fact that there was a marginal growth in ARRs and Revenue per available rooms (RevPARs). The premium room inventory database of ICRA indicates 8% compounded annual growth in supply during FY2017-FY2020..........

OYO Rooms

Ritesh Agarwal (Ritesh), Founder CEO of OYO Rooms, hailed from a small town of Bissam, Cuttack, Odisha and had dropped out of college to pursue his dream of becoming an entrepreneur. In 2011, at the age of 19 years, Ritesh started his entrepreneurial journey by founding Oravel Stays Private Limited, an online platform for listing and booking accommodation based on the AirBnB model.

In 2013, Ritesh was selected for Thiel fellowship, a two-year programme, exclusively for college dropouts, set up by PayPal founder, Peter Thiel, which included mentorship and a $1,00,000 grant to launch his business. During his early days at Oravel Stays, Ritesh had painful experiences of staying in guesthouses and other bed and breakfast accommodations in the country............

OYO Rooms: Financial Health

The growth of Softbank funded budget hotel aggregator, OYO Rooms has been exponential since its inception. As per the company sources, booked revenue grew from INR36.1 cr in March 2015 to INR 1,067.4 cr in March 2016 to INR1,598.7 cr in March 2017. But as compared to the booked revenue, OYO’s revenue share did not show a proportionate rise. OYO’s share was INR2.4 cr in March 2015, INR32.8 cr in March 2016 and INR102.3 cr in March 2017. OYO incurred losses of INR20.8 cr in March 2015, which swelled to INR496.3 cr in March 2016. In March 2017, the losses amounted to INR325.3 cr presenting a decrease of 65% in losses as compared to the previous year............

The Business Model

OYO’s business model was based on three fundamentals – standardization, affordability and technology-driven experience for the customers. Its mission was summarized in the statement on its website: “Our goal is to change the way people stay away from home”. OYO aimed at providing similar amenities across all its rooms at affordable prices to its customers. Moreover, it pioneered the use of technology for efficient management, services and operations............

OYO Partners

OYO mostly entered into contract with budget hotels in the unorganized sector, majorly targeting 2- or 3-star hotels. The major concern for the hotel owners was lack of visibility in the market due to low marketing which kept the customers away from these hotels leading to low occupancy rates. OYO facilitated in this matter and provided the hotel owners a platform to reach the customers............

OYO and Technology

To achieve operational excellence, OYO built a highly sophisticated software, which enabled it to handle huge digital transactions. The customer could use company website or mobile app for hotel booking. For customers who were less tech-savvy, option of booking rooms via telephone call or through partner OTAs was also made available..........

Operations at OYO

The key area of activity at OYO was marketing with the use of technology to easily connect the customer with the hotel owners. Another important activity of OYO was identification and procurement of properties and transforming the facility as per the requirement of the customers. Transformation of the properties involved activities like identification of vendors and negotiating with them for procuring various consumables, toiletries, etc. To maintain standardization, OYO insisted on renovation of the contracted property, which included – 32-inch-flat-screen television, 6-inch shower heads, beverage trays, spotless bed linen, etc.........

OYO’s Customer Base

OYO’s customer base included regular travellers and tourists, looking out for affordable, comfortable hotel experience. OYO could successfully reach the target customers through its mobile app. In order to widen the market reach, OYO created two sub-divisions of customers:.........

OYO Rooms: Business Strategy

In the hospitality sector, many a times the customers were unable to predict the type of services available at the booked hotel. Generally, customers booked hotels viewing the decent photographs of the concerned hotel on its website. But to their surprise, the facilities actually available at the hotel were not upto the standards. This disappointed the customers a lot..........

Key Differentiators at OYO

For OYO, innovation has been its trademark while the key differentiator was convenience for the customers which helped it with its brand strategy. OYO Rooms became a budget traveller’s first choice because of its predictability and accessibility – the key customer issues on which the brand was built. With the use of technology, OYO captured the data regarding consumer behaviour and used this data to deliver what the customers wanted.............

Sustainable Competitive Strategy by OYO

OYO made good use of mass as well as digital marketing for generating leads and acquiring customers. This strategy also helped OYO retain its ranking above its competitors. With the help of social media, OYO captured the data of its potential customers like customers’ interests, behaviour and other details which was used to improve OYO’s performance in the market...........

New Initiative by OYO Rooms: Service Apartments

“Service Apartment is a huge opportunity. We are doing a lot of work there and are signing very large apartments”, Ritesh stated in one of the interviews with the media. The new initiative of OYO was aimed at increasing the scope of budget hotel customers by providing service apartments and home stays. This was in addition to the existing budget hotels provided to the customers..........

Challenges Ahead

OYO was charging up to expand its presence in budget and premium segment, when it faced a challenging situation. In 2017, AirBnb, the global hotel aggregator announced its offerings in India to provide a good local experience to its customers through its AirBnb trips. The $31 bn valued global startup was a threat to OYO in India.

OYO also had to confront protests from traditional hoteliers, quite similar to the way rental car services like Ola and Uber faced strong opposition from taxi and auto rickshaw unions. OYO had entered the market at a time when hotel industry was witnessing a bad downcycle.........

Assignment Questions

I. Analyze the hotel industry using Porter’s Five Forces Model.II. What are the competencies of OYO Rooms that strengthen its business model?III. Discuss Blue Ocean Strategy at OYO Rooms.IV. .........

Teaching Note Preview

OYO Rooms: Start-up to Branded Budget Hotels, What Next?

Case Synopsis

In a technology enabled competition it is very challenging to be highly sustainable in the long run. Customers expect fast-paced response, quality, low cost, transparency and ease of operations. Hotel accommodation service is no exception to all these challenges. In fact, looking at the dense network of available hotels and the service options provided by them makes the task of choosing the right hotel accommodation difficult for the customer.

This case study highlights how a 19-year old entrepreneur, Ritesh Agarwal (Ritesh), tried to bridge the gap between the hotels and the customers with his start-up, OYO Rooms (OYO). OYO is India’s largest branded hotel chain with about 6500+ hotels (as on April 2017) spread across 200 towns and cities in the country since its inception in May 2013.

The hotel industry in India majorly consists of unorganized hotels and a few brands dealing in budget hotels. There has been a rise in the number of domestic as well as international travellers. Moreover, many travellers opt for budget hotels, thus increasing the scope for budget hotels. OYO is India’s largest network of branded hotels. OYO has been successful in creating a model in the hospitality sector for others to follow.

OYO Rooms has made a good use of technology to provide customers hassle-free standardized hospitality experience. OYO’s innovative business model has set-up a trend in budget hotel accommodation, which has been adopted by many others. However, this poses a threat to OYO Rooms for long term sustainability. The case details the startup’s growth story, its business model, and the issues and challenges faced by OYO. This case mainly focuses on exploring the sustainable competitive strategies adopted by OYO and analyzes the key competitors in the strategic group of budget hotels.

This case can be used for MBA Programme covering topics on Strategic Management and Entrepreneurship.

Case Objectives

This case is mainly written with the following objectives:

• To study the business model of OYO Rooms• To analyze the growth strategy of OYO Rooms• To focus on exploring the sustainable competitive strategies adopted by OYO Rooms

Assignment Questions

I. Analyze the hotel industry using Porter’s Five Forces Model.II. What are the competencies of OYO Rooms that strengthen its business model?III. Discuss Blue Ocean Strategy at OYO Rooms.IV...........

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Abstract

In a technology enabled competition it is very challenging to be highly sustainable in the long run. Customers expect fast-paced response, quality, low cost, transparency and ease of operations. Hotel accommodation service is no exception to all these challenges. In fact, looking at the dense network of available hotels and the service options provided by them makes the task of choosing the right hotel accommodation difficult for the customer.

This case study highlights how a 19-year old entrepreneur, Ritesh Agarwal (Ritesh), tried to bridge the gap between the hotels and the customers with his start-up, OYO Rooms (OYO). OYO is India’s largest branded hotel chain with about 6500+ hotels (as on April 2017) spread across 200 towns and cities in the country since its inception in May 2013.

The hotel industry in India majorly consists of unorganized hotels and a few brands dealing in budget hotels. There has been a rise in the number of domestic as well as international travellers. Moreover, many travellers opt for budget hotels, thus increasing the scope for budget hotels. OYO is India’s largest network of branded hotels. OYO has been successful in creating a model in the hospitality sector for others to follow.

OYO Rooms has made a good use of technology to provide customers hassle-free standardized hospitality experience. OYO’s innovative business model has set-up a trend in budget hotel accommodation, which has been adopted by many others. However, this poses a threat to OYO Rooms for long term sustainability. The case details the startup’s growth story, its business model, and the issues and challenges faced by OYO. This case mainly focuses on exploring the sustainable competitive strategies adopted by OYO and analyzes the key competitors in the strategic group of budget hotels.

Case Objectives

This case is mainly written with the following objectives:

To study the business model of OYO Rooms

To analyze the growth strategy of OYO Rooms

To focus on exploring the sustainable competitive strategies adopted by OYO Rooms

Case Positioning

This case can be used for MBA Programme covering topics on Strategic Management and Entrepreneurship.

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